MERRILL LYNCH
PACIFIC FUND, INC.
FUND LOGO
Quarterly Report
September 30, 1998
This report is not authorized for use as an offer of sale or a
solicitation of an offer to buy shares of the Fund unless
accompanied or preceded by the Fund's current prospectus. Past
performance results shown in this report should not be considered a
representation of future performance. Investment return and
principal value of shares will fluctuate so that shares, when
redeemed, may be worth more or less than their original cost.
Statements and other information herein are as dated and are subject
to change.
Merrill Lynch
Pacific Fund, Inc.
Box 9011
Princeton, NJ
08543-9011
Printed on post-consumer recycled paper
MERRILL LYNCH PACIFIC FUND, INC.
DEAR SHAREHOLDER
For the quarter ended September 30, 1998, Merrill Lynch Pacific
Fund, Inc.'s Class A, Class B, Class C and Class D Shares had total
returns of -8.91%, -9.12%, -9.15% and -8.97%, respectively,
outperforming the -11.52% total return for the unmanaged Benchmark
Index of Pacific Basin stock markets. (Fund results do not reflect
sales charges, and would be lower if sales charges were included.
Complete performance information, including average annual total
returns, can be found on pages 3--5 of this report to
shareholders.)
Continued weakness in the Pacific Basin stock markets led to the
Fund's declines for the September quarter. The unmanaged Tokyo Stock
Exchange Index lost 15% in local currency terms. The unmanaged
Nikkei 225 Index (a better-known, but less-representative index of
Japanese stocks) closed the quarter only slightly above 13,000 (a
level it breached in early October), which was its lowest level
since 1986.
Key Developments in October
The September quarter was rather uneventful in terms of new
developments within our stock markets, with the exception of capital
controls imposed by the Malaysian government. We had no exposure to
Malaysia so the Fund was not impacted. We will monitor the situation
in Malaysia to determine when and if we believe it is safe to invest
there. However, shortly after the September quarter's close, some
key events took place with important implications for the investment
environment in Asia. First, the yen appreciated very sharply
relative to the US dollar, moving from 136 yen/US dollar to 115
yen/US dollar within the first two weeks of October. Second, smaller
Asian stock markets began appreciating sharply. For example, the
Indonesian stock market appreciated 15.4% in US dollar terms on
October 16 alone. Another example of a rapidly rising stock market
was Thailand, which rose 8.8% in US dollar terms on October 8 and
another 8.1% on October 16. Many of the smaller Asian stock markets
(with the exception of Hong Kong) had been in significant downtrends
since the end of 1993.
Much of the impetus behind these sudden surges in stock prices
appears to be a reaction to the US stock market's declines. In our
view, when the US stock market was at its recent historically high
valuation levels, it did not at all reflect the economic problems in
much of the world, notably the Pacific Basin. More recently, when
the Russian economy stumbled, followed by Brazil, it triggered stock
market declines in the United States. These events were followed
shortly by extraordinary losses among a number of high-profile hedge
funds. Some of these hedge funds had purchased Russian and other
emerging markets debt (or equities). The funds had also borrowed yen
to leverage their purchases, and had also tried to hedge interest
rate risk by taking short positions in US Treasury bonds.
Unfortunately, these strategies all resulted in substantial losses.
The Russian debt market collapsed, and US Treasury bond prices rose
as their yields dropped. The extraordinary declines experienced by
many hedge funds had negative ramifications for a much broader cross-
section of financial firms. Hedge funds will often borrow many times
their net worth to engage in trading strategies, which are financed
by stock brokerage firms and commercial banks. For example, a hedge
fund may have as little as $4 billion of equity capital, but may
borrow $100 billion to invest. If its key trading strategies lose
money, the fund can lose not only all of its equity, but some of the
borrowed capital as well.
Merrill Lynch Pacific Fund, Inc.
September 30, 1998
Hedge fund losses created such potential problems for world
financial stability that the US Federal Reserve Board stepped in and
eased monetary policy, notably at a previously unscheduled meeting
of the Federal Open Market Committee. The fact that the Federal
Reserve Board intervened in this manner seems to have lifted
investors' spirits. Hedge funds' strategies of borrowing yen,
shorting Japanese and other Asian stocks, and shorting US Treasury
bonds all led to unprecedented losses, which were magnified by
leverage. As hedge funds moved in October to cover these short
positions to stem losses, the yen strengthened relative to the US
dollar and the Japanese and other Asian stock markets rallied.
However, we would caution that these events do not necessarily
signal an end to our concerns regarding these stock markets. The
Japanese economy remains mired in a recession, which a continued yen
strengthening can only worsen. Furthermore, the financial markets in
countries such as Malaysia, Indonesia, South Korea and Thailand are
receiving virtually no new liquidity inflows.
One positive aspect of the stronger yen is that it increases the
Japanese monetary authorities' flexibility to increase the money
supply, and thereby hopefully stimulate the economy out of
recession. This strategy would not have been possible when the yen
was weak, because it would have weakened the currency further, with
disastrous results for other Asian economies, if not the entire
world economy. However, if Japan now dramatically increases its
money supply to act as a catalyst for reviving the economy, the yen
now has room to weaken somewhat from current levels relative to the
US dollar.
Another area in which investors have been awaiting positive
developments is banking system reform in Japan. In October, Japan at
last made positive, although incomplete, progress toward dealing
with the problems of the banking system. Public funds are now
clearly earmarked to help solve Japan's banking crisis. However,
since there are often punitive ramifications for bank managements
should they request (and receive) these funds, it is not at all
clear that they will request government aid. Although this plan will
not fully address the problems of the Japanese banking system, it is
a step in the right direction. Nevertheless, stresses remain on the
Japanese financial system. As we have noted, business conditions
remain depressed and the country has a looming pension funding
problem that must be also be resolved.
Finally, in October, the International Monetary Fund (IMF) put
together a plan to deal with Latin America's problems (specifically
Brazil), and thereby give the world hope that if this plan is
successful, the IMF and Group of Seven Industrial Nations will then
turn their attention to Asia. With Japan in the position to weaken
its currency (by allowing the money supply to increase), and with
Asian countries--such as Thailand and South Korea--ready to
cooperate with IMF rescue plans, the worst of the Asian financial
crisis may be behind us.
In Conclusion
The recent sharp positive moves in the Japanese yen and smaller
Asian stock markets may prove to be short-lived. However, we believe
that over the longer term, these economies will recover and Asian
companies will again become profitable. This improved profitability
should, over time, be reflected in higher share prices.
Although the recent rebounds in Asian stock markets may be nothing
more than short-term recoveries from oversold conditions coupled
with hedge fund short covering, we believe that some economies may
begin to make some positive progress. Therefore, after a few years
of a terrible bear market in Asia, we may at last be approaching a
bottom.
We thank you for your continued investment in Merrill Lynch Pacific
Fund, Inc., and we look forward to reviewing our outlook and
strategy with you again in our upcoming annual report to
shareholders.
Sincerely,
(Arthur Zeikel)
Arthur Zeikel
President
(Stephen I. Silverman)
Stephen I. Silverman
Senior Vice President and Portfolio Manager
November 16, 1998
Merrill Lynch Pacific Fund, Inc.
September 30, 1998
PERFORMANCE DATA
About Fund Performance
Investors are able to purchase shares of the Fund through the
Merrill Lynch Select Pricing SM System, which offers four pricing
alternatives:
* Class A Shares incur a maximum initial sales charge (front-end
load) of 5.25% and bear no ongoing distribution or account
maintenance fees. Class A Shares are available only to eligible
investors.
* Class B Shares are subject to a maximum contingent deferred sales
charge of 4% if redeemed during the first year, decreasing 1% each
year thereafter to 0% after the fourth year. In addition, Class B
Shares are subject to a distribution fee of 0.75% and an account
maintenance fee of 0.25%. These shares automatically convert to
Class D Shares after approximately 8 years. (There is no initial
sales charge for automatic share conversions.)
* Class C Shares are subject to a distribution fee of 0.75% and an
account maintenance fee of 0.25%. In addition, Class C Shares are
subject to a 1% contingent deferred sales charge if redeemed within
one year of purchase.
* Class D Shares incur a maximum initial sales charge of 5.25% and
an account maintenance fee of 0.25% (but no distribution fee).
None of the past results shown should be considered a representation
of future performance. Figures shown in the "Recent Performance
Results" and "Average Annual Total Return" tables assume
reinvestment of all dividends and capital gains distributions at net
asset value on the ex-dividend date. Investment return and principal
value of shares will fluctuate so that shares, when redeemed, may be
worth more or less than their original cost. Dividends paid to each
class of shares will vary because of the different levels of account
maintenance, distribution and transfer agency fees applicable to
each class, which are deducted from the income available to be paid
to shareholders.
Merrill Lynch Pacific Fund, Inc.
September 30, 1998
PERFORMANCE DATA (continued)
<TABLE>
Recent Performance Results
<CAPTION>
Market Performance Market Capitalization
In Local Currency/In US Dollars (as of 6/30/98)
3 Month 12 Month In US Dollars % of Total
% Change % Change (Billions) (100.0%)
<S> <C> <C> <C> <C>
ML Pacific Fund, Inc. Class A Shares--Total Investment Return* - 8.91% -26.58%(1)
ML Pacific Fund, Inc. Class B Shares--Total Investment Return* - 9.12 -27.34(2)
ML Pacific Fund, Inc. Class C Shares--Total Investment Return* - 9.15 -27.35(3)
ML Pacific Fund, Inc. Class D Shares--Total Investment Return* - 8.97 -26.75(4)
Market-Weighted Index** -12.02 -35.58
Benchmark Index*** -11.52 -36.81
Japan -15.18/-13.65 -24.83/-33.36 $2,136 74.1%
Australia - 3.05/-7.39 - 6.50/-23.60 295 10.2
Hong Kong - 7.72/-7.72 -47.62/-47.68 308 10.7
Malaysia -18.02/-10.63 -54.15/-60.87 66 2.3
Singapore - 3.76/-3.44 -34.32/-40.33 72 2.5
Thailand - 5.05/+1.49 -53.39/-56.85 6 0.2
<FN>
(1)Percent change includes reinvestment of $1.000 per share ordinary
income dividends and $2.206 per share capital gains distributions.
(2)Percent change includes reinvestment of $0.740 per share ordinary
income dividends and $2.206 per share capital gains distributions.
(3)Percent change includes reinvestment of $0.756 per share ordinary
income dividends and $2.206 per share capital gains distributions.
(4)Percent change includes reinvestment of $0.940 per share ordinary
income dividends and $2.206 per share capital gains distributions.
*Investment results shown do not reflect sales charges; results
shown would be lower if a sales charge was included.
**Unmanaged. The Market-Weighted Index represents the market-
weighted, US dollar-denominated percentage change in each of the
individual country indexes as shown in the table (which exclude
dividends), using Morgan Stanley Capital International data. June
30, 1998 market weights are used for the 3-month results, and
September 30, 1997 market weights are used for the 12-month results.
***Unmanaged. The Benchmark Index is a customized index used to
measure the Fund's relative performance, comprised as follows: 68%
Tokyo Stock Exchange Index, 7% Australia All Ordinaries Index, 14%
Hang Seng Index (Hong Kong), 5% Kuala Lumpur Stock Exchange
Composite Index (Malaysia), 4% DBS 50 Index (Singapore), and 2% SET
(Thailand). The Benchmark Index represents the percentage change in
each of these indexes in US dollar terms (excluding dividends),
multiplied by the market weights shown.
</TABLE>
Merrill Lynch Pacific Fund, Inc.
September 30, 1998
PERFORMANCE DATA (concluded)
Results of a $1,000 Investment Since Inception--Class A Shares
(5.25% sales charge--$947.50 net amount invested; assuming
reinvestment of all dividends and capital gains distributions)
A mountain chart depicting the growth of an investment in the Fund's
Class A Shares from $947.50 on September 23, 1976 to $15,610.35 on
September 30, 1998.
Average Annual Total Return
% Return Without % Return With
Sales Charge Sales Charge**
Class A Shares*
Year Ended 9/30/98 -26.58% -30.43%
Five Years Ended 9/30/98 + 0.33 - 0.75
Ten Years Ended 9/30/98 + 6.16 + 5.59
[FN]
*Maximum sales charge is 5.25%.
**Assuming maximum sales charge.
% Return % Return
Without CDSC With CDSC**
Class B Shares*
Year Ended 9/30/98 -27.34% -29.74%
Five Years Ended 9/30/98 - 0.69 - 0.69
Inception (10/21/88)
through 9/30/98 + 4.48 + 4.48
[FN]
*Maximum contingent deferred sales charge is 4% and is reduced to 0%
after 4 years.
**Assuming payment of applicable contingent deferred sales charge.
% Return % Return
Without CDSC With CDSC**
Class C Shares*
Year Ended 9/30/98 -27.35% -27.94%
Inception (10/21/94)
through 9/30/98 - 2.71 - 2.71
[FN]
*Maximum contingent deferred sales charge is 1% and is reduced to 0%
after 1 year.
**Assuming payment of applicable contingent deferred sales charge.
% Return Without % Return With
Sales Charge Sales Charge**
Class D Shares*
Year Ended 9/30/98 -26.75% -30.60%
Inception (10/21/94)
through 9/30/98 - 1.94 - 3.28
[FN]
*Maximum sales charge is 5.25%.
**Assuming maximum sales charge.
Merrill Lynch Pacific Fund, Inc.
September 30, 1998
<TABLE>
SCHEDULE OF INVESTMENTS
<CAPTION>
Shares Held/ Percent of
Industry Face Amount Investments Cost Value Net Assets
Japan Securities
<S> <S> <C> <S> <C> <C> <C>
Automobile 3,538,000 Suzuki Motor Corp. $ 39,518,483 $ 35,715,318 3.2%
Beverage 380,000 Chukyo Coca-Cola Bottling Co., Ltd. 5,420,506 2,931,452 0.3
424,000 Hokkaido Coca-Cola Bottling Co., Ltd. 6,399,350 3,956,212 0.3
386,000 Kinki Coca-Cola Bottling Co., Ltd. 7,430,096 4,225,553 0.4
476,000 Mikuni Coca-Cola Bottling Co., Ltd. 8,487,431 7,518,919 0.7
517,000 Sanyo Coca-Cola Bottling Co., Ltd. 7,028,799 4,672,030 0.4
-------------- -------------- ------
34,766,182 23,304,166 2.1
Chemicals 2,204,000 Shin-Etsu Chemical Co., Ltd. 42,829,588 35,057,380 3.2
Consumer YEN 409,000,000 Matsushita Electric Works, Ltd.--
Electronics C.E.W. #8, 2.70% due 5/31/2002
(Convertible) 4,543,869 3,617,927 0.3
547,500 Sony Corporation 50,737,723 38,173,352 3.5
-------------- -------------- ------
55,281,592 41,791,279 3.8
Containers 1,766,000 Toyo Seikan Kaisha, Ltd. 49,371,128 23,030,270 2.1
Electric 1,887,000 Chudenko Corp. 55,433,121 36,600,397 3.3
Construction 3,141,000 Kinden Corp. 50,306,149 35,053,846 3.1
1,232,000 Taihei Dengyo Kaisha, Ltd. 24,789,475 4,073,176 0.4
-------------- -------------- ------
130,528,745 75,727,419 6.8
Electric Equipment 2,104,000 Murata Manufacturing Co., Ltd. 76,957,866 71,261,774 6.4
3,910,000 NEC Corporation 56,508,104 25,423,187 2.3
440,000 Rohm Co., Ltd. 24,387,301 42,024,833 3.8
-------------- -------------- ------
157,853,271 138,709,794 12.5
Office Equipment 3,293,000 Canon, Inc. 58,843,215 67,016,457 6.0
Pharmaceuticals 1,411,000 Sankyo Co., Ltd. 32,671,343 31,307,178 2.8
2,418,000 Yamanouchi Pharmaceutical Co., Ltd. 61,660,320 52,229,226 4.7
-------------- -------------- ------
94,331,663 83,536,404 7.5
Property & Casualty 9,351,000 Dai-Tokyo Fire & Marine Insurance
Insurance Co., Ltd. 55,540,249 26,656,293 2.4
4,492,000 Fuji Fire & Marine Insurance
Co., Ltd. 16,261,457 8,217,677 0.7
7,539,000 Koa Fire & Marine Insurance
Co., Ltd. 45,292,612 22,155,609 2.0
8,191,000 Nichido Fire & Marine Insurance
Co., Ltd. 46,307,188 36,167,739 3.3
8,062,000 Sumitomo Marine & Fire Insurance
Co., Ltd. 67,721,997 38,796,635 3.5
4,662,000 Tokio Marine & Fire Insurance Co., Ltd. 46,990,608 41,787,084 3.8
-------------- -------------- ------
278,114,111 173,781,037 15.7
Retailing 1,012,000 Ito Yokado Co., Ltd. 54,243,397 48,328,558 4.3
364,000 Sangetsu Co., Ltd. 8,382,717 4,185,291 0.4
-------------- -------------- ------
62,626,114 52,513,849 4.7
Tires & Rubber 1,741,000 Bridgestone Corporation 30,050,264 35,175,593 3.2
Total Investments in Japan 1,034,114,356 785,358,966 70.8
</TABLE>
Merrill Lynch Pacific Fund, Inc.
September 30, 1998
<TABLE>
SCHEDULE OF INVESTMENTS (continued)
<CAPTION>
Percent of
Industry Shares Held Investments Cost Value Net Assets
<S> <C> <S> <C> <C> <C>
Australia Securities
Leisure 14,055,889 Village Roadshow Ltd. 'A' (Preferred) $ 31,688,289 $ 18,716,119 1.7%
Property 3,950,126 Lend Lease Corp. 53,232,576 84,156,644 7.6
Total Investments in Australia 84,920,865 102,872,763 9.3
Hong Kong Securities
Banking 1,315,228 HSBC Holdings plc 31,159,579 24,104,592 2.2
Conglomerates 10,203,035 Hutchison Whampoa Ltd. 76,695,682 53,727,908 4.8
Total Investments in Hong Kong 107,855,261 77,832,500 7.0
India Securities
Banking 3,257,000 Industrial Development Bank of India 11,173,586 3,819,559 0.3
Broadcast/Media 620,000 BITV 3,557,823 0 0.0
Diversified Mutual 1,929,200 Master Plus 1,146,713 771,589 0.1
Funds
Financial Services 77,300 Housing Development Finance
Corporation Ltd. 6,255,618 4,411,280 0.4
Total Investments in India 22,133,740 9,002,428 0.8
New Zealand Securities
Diversified 31,103,606 Guinness Peat Group PLC 20,761,901 19,284,236 1.7
Total Investments in New Zealand 20,761,901 19,284,236 1.7
Singapore Securities
Airlines 1,518,000 Singapore Airlines Ltd. 7,188,602 8,343,137 0.7
Banking 6,120,000 Overseas Chinese Banking Corporation
Ltd.--Foreign 29,037,851 15,418,182 1.4
Total Investments in Singapore 36,226,453 23,761,319 2.1
South Korea Securities
Banking 462,360 Hana Bank (GDR)(a) 7,001,895 1,606,701 0.1
Total Investments in South Korea 7,001,895 1,606,701 0.1
</TABLE>
Merrill Lynch Pacific Fund, Inc.
September 30, 1998
<TABLE>
SCHEDULE OF INVESTMENTS (concluded)
<CAPTION>
Percent of
Industry Shares Held Investments Cost Value Net Assets
<S> <S> <C> <S> <C> <C> <C>
Thailand Securities
Broadcast/Media 2,192,000 BEC World Public Company
Limited (Foreign) $ 17,579,558 $ 10,715,704 1.0%
Total Investments in Thailand 17,579,558 10,715,704 1.0
Face
Amount
Short-Term Securities
Commercial US$ 55,571,000 General Motors Acceptance Corp.,
Paper* 5.88% due 10/01/1998 55,571,000 55,571,000 5.0
Total Investments in Short-Term
Securities 55,571,000 55,571,000 5.0
Nominal Value Premiums
Covered by Option Issue Paid
Currency Put Options Purchased
US$ 640,000,000 Japanese Yen, expiring December 1998
at YEN 137 20,000,000 14,080,000 1.3
224,625,000 Japanese Yen, expiring February 1999
at YEN 130.5 6,705,056 12,219,600 1.1
Total Currency Put Options Purchased 26,705,056 26,299,600 2.4
Total Investments $1,412,870,085 1,112,305,217 100.2
==============
Unrealized Depreciation on Forward Foreign Exchange Contracts** (1,616,143) (0.1)
Liabilities in Excess of Other Assets (610,084) (0.1)
-------------- ------
Net Assets $1,110,078,990 100.0%
============== ======
Net Asset Value: Class A--Based on net assets of $521,323,162 and 33,987,802
shares outstanding $ 15.34
==============
Class B--Based on net assets of $455,600,394 and 31,535,911
shares outstanding $ 14.45
==============
Class C--Based on net assets of $48,948,711 and 3,448,242
shares outstanding $ 14.20
==============
Class D--Based on net assets of $84,206,723 and 5,497,779
shares outstanding $ 15.32
==============
<FN>
(a)Global Depositary Receipts (GDR).
*Commercial Paper is traded on a discount basis; the interest rate
shown reflects the discount rate paid at the time of purchase by the
Fund.
**Forward foreign exchange contracts as of September 30, 1998 were
as follows:
Foreign Expiration Unrealized
Currency Sold Date Depreciation
HK$ 683,843,567 October 1998 $ (1,616,143)
Total Unrealized Depreciation on Forward
Foreign Exchange Contracts--Net
(US$ Commitment--$86,530,973) $ (1,616,143)
============
</TABLE>
Merrill Lynch Pacific Fund, Inc.
September 30, 1998
PORTFOLIO INFORMATION
As of September 30, 1998
Percent of
Ten Largest Equity Holdings Net Assets
Lend Lease Corp. 7.6%
Murata Manufacturing Co., Ltd. 6.4
Canon, Inc. 6.0
Hutchison Whampoa Ltd. 4.8
Yamanouchi Pharmaceutical Co., Ltd. 4.7
Ito Yokada Co., Ltd. 4.3
Rohm Co., Ltd. 3.8
Tokio Marine & Fire Insurance Co., Ltd. 3.8
Sumitomo Marine & Fire Insurance
Co., Ltd. 3.5
Sony Corporation 3.5
Percent of
Ten Largest Industries Net Assets
Property & Casualty Insurance 15.7%
Electric Equipment 12.5
Property 7.6
Pharmaceuticals 7.5
Electric Construction 6.8
Office Equipment 6.0
Conglomerates 4.8
Retailing 4.7
Banking 4.0
Consumer Electronics 3.8
Equity Portfolio Changes
For the Quarter Ended September 30, 1998
Addition
Singapore Airlines Ltd.
Deletions
Cheung Kong (Holdings)Ltd.
Mitsubishi Heavy Industries, Ltd.
United Overseas Bank Group--Foreign
Merrill Lynch Pacific Fund, Inc.
September 30, 1998
OFFICERS AND DIRECTORS
Arthur Zeikel, President and Director
Donald Cecil, Director
Edward H. Meyer, Director
Charles C. Reilly, Director
Richard R. West, Director
Edward D. Zinbarg, Director
Terry K. Glenn, Executive Vice President
Norman R. Harvey, Executive Vice President
Stephen I. Silverman, Senior Vice President
and Portfolio Manager
Donald C. Burke, Vice President
Gerald M. Richard, Treasurer
Robert Harris, Secretary
Custodian
Brown Brothers Harriman & Co.
40 Water Street
Boston, MA 02109
Transfer Agent
Financial Data Services, Inc.
4800 Deer Lake Drive East
Jacksonville, FL 32246-6484
(800) 637-3863
